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Oil Sands Output Growth Second Only To Shale

Canada’s Mordor, as environmentalists like to call the oil sands, is notorious for how “dirty” oil extraction is there. It’s also notorious for how expensive it is to extract. The dirt argument, which concerns the energy intensity of oil sands production compared to other oil extraction methods, has been partially refuted: some oil production in California is dirtier than oil sands. The price argument is also being refuted by the producers themselves: oil sands extraction is becoming cheaper, and it is rising.

Oil sands production has historically had some of the highest production prices in the industry due to the complexity of the process that turns bitumen into fluid crude oil. Like their peers in the shale patch, however, oil sands miners were motivated to increase their efficiency during the recent price crash. The results from this boost are now becoming evident.

Earlier this week, the Canadian Association of Petroleum Producers reported a forecast that the industry will reduce its spending for the third year in a row in 2017—to US$11.3 billion (C$15 billion). This is compared to US$25.6 billion (C$34 billion) spent in 2014.

One interpretation of this forecast is that international pries are still weak, and this fuels uncertainty about growth prospects. In other words, oil sand miners are being cautious.

Yet this is not the whole story, especially if we look at another recent release, this time from HIS Markit. According to the market researcher, oil sands output will grow by half a million barrels daily in the current financial year—despite lowered spending. This means that Canada’s oil sands will be the second-largest source of oil supply growth, after the U.S. shale patch. Related: How A $200,000 Well Could Drastically Change The Oil Industry

Production growth is not generally seen as a sign of weakness in an industry. It’s quite the opposite, in fact, so this output growth after the recent Big Oil exodus from the oil sands may look confusing. Yet Big Oil has its own agenda: focus on quicker-return, lower-cost projects anywhere in the world. Canadian oil sands miners, on the other hand, as Wood Mackenzie expert Michael Hebert noted in a recent analysis of the industry, are much more locally focused, reinvesting solidly in projects at home rather than seeking international expansion. In their case, production growth is the only way to go, pretty much like shale drillers.

To date, about 70 percent of all Canadian oil sands projects are the property of the four biggest local companies in this sector. That’s a major consolidation that will motivate more efforts going into further improving production efficiency, while at the same time, reducing the energy intensity of oil sands production. With the exit of Shell, Conoco, and Marathon, Canadian energy companies can now only rely on themselves to come up with better mining and processing technology to optimize their production, bringing down costs.

According to Wood Mac’s Hebert, project optimization along with boosting operating efficiencies will be the two drivers behind growth in the oil sands industry in the near term. According to IHS Markit’s Kevin Birn, growth in the industry will come from raising output from existing projects rather than launching new ones, and from improving their utilization rates.

In a sub-$50 price environment, this seems like the best course of action. Despite all the efficiency and utilization rate improvements already made, oil sands extraction remains a high-cost production method compared with conventional oil and shale.

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So , all this production increase and efficiency gains should translate into awesome profits and stock gains for all the producers even at $ 45 oil then ? Not. Something is amiss here . We are continuously told nothing but bearish news and yet these guys continue to get financing and support and do nothing but increase production in an environment that should be bankrupting them.

John Scior on June 18 2017 said:

Just a thought experiment here. Suppose I buy cherries at the market and then suddenly for no apparent reason the price of cherries goes up. Way up. To the point that cherry pie makers are going out of business and the grocery stores ( as it turns out had colluded to raise prices ) are making money hand over fist. I then become determined to have cherries so I plant a tree and a few years later I pay someone to pick cherries so I can once again can enjoy a cherry pie. And as it turns out many of my neighbors have done the same. The monopoly has been broken and the grocers once again charge a reasonable price for cherries. Do my neighbors and I chop down our cherry trees ? No. Although the cost of these tar sands extraction is expensive, it provides an alternative source for oil. Even though the price you pay for the oil for this technique may exceed the price you can obtain, for said oil. The fact that you have a backup plan allows your refiners and gasoline stations the ability to purchase oil for refining and retail sale at a lower price and thus the sunk costs of the tar sands project and extraction are mitigated by the overall low price you obtain on the world market. Enjoy some cherry pie !

Peter B on June 19 2017 said:

Canada's oil sands also benefits from all the technical talent that has fled Valenzuela to work in the oil sands thanks to the crazy government they have there.

George B on June 19 2017 said:

The tar sands are a immense natural resource to Canada and their development is not only inevitable, it's an economic imperative. The Kinder Morgan pipeline to Vancouver will triple tar sands oil production to a competitive world scale energy supplier to China and India. Trudeau is just like other progressive politicians. Talks-up greenhouse gas emissions and global warming while pushing the Hell out of fossil fuels exports to make money to sustain the socialist state.

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